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A healthy economy needs a dynamic manufacturing sector | CIVITAS

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A healthy economy needs a dynamic manufacturing sector

Posted on 31 July 2013 by Kaveh Pourvand

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Previously, I blogged on the importance of manufacturings contribution to GDP. I argued that the small size of manufacturings GDP contribution relative to that of services is actually a sign of the sectors strength. Why?

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Largest trade gap on record Time to move on from the old economic model Was British Leyland really an industrial policy disaster? Why the Laffer curve should not be laffed at During UK export week: How Singapore became a net exporter Manufacturing exhibits faster productivity growth than services and GDP is a measure of value or price paid. Manufacturing productivity growth means that the annual production of the quantity of manufactured goods increases over time. This decreases the price of manufactured goods on the market, a process which is captured by economic statistics as a lower contribution of manufacturing to GDP. In the service sector on the other hand, productivity is generally static but wages have to increase in line with the high productivity manufacturing sector, leading to an increase in the price of services, which is captured as a higher contribution to GDP. One might say that a healthy service sector thrives on the underlying dynamism of the manufacturing sector. Nevertheless, we should be wary of the manufacturing sector becoming too small as it is crucial for paying our way in the world through trade. If this analysis is correct, then increasing manufacturing output may be even more important to Britains economic future than implied by the current, vague talk of rebalancing. However, critics may point to countries such as Finland, Singapore or Switzerland. All of these are highly successful economies which appear to have built their success on services such as finance, telecommunications and tourism. Isnt manufacturing irrelevant in these economies? Quite the opposite. As Ha-Joon Chang has points out, they are in fact among the most industrialised economies in the world, measured in per capita terms. (It is important
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A healthy economy needs a dynamic manufacturing sector | CIVITAS

to take into account population because they are small countries Singapore is never going to produce more manufacturing output than China in absolute terms.) On this metric, Switzerland has the second highest industrial output in the world after Japan. Singapore, Finland and also Sweden are also in the top five per capita manufacturers.* Manufacturing really does matter. Rebalancing is not just about spreading prosperity more widely in the UK, important as that is, but also about improving the economic performance of the whole country. What a shame then, that the Chancellors growth strategy has seemingly changed. There is now less emphasis on promoting export-led, manufacturing growth and more emphasis on increasing asset prices through the new Help to Buy mortgage subsidy scheme. This seems to be a return to the old debt-fuelled, consumer spending model that we relied upon for growth before 2008. The first time round, this economic model had tragic consequences for the economy. Lets hope history is not now repeating itself as farce. *Chang, 23 Things you Dont Know about Capitalism, see Thing 9.
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This entry was posted in Economics, Industrial Policy, Manufacturing, Uncategorized and tagged British economy, business, Economics, Economy, Financial Services, Finland, GDP, George Osborne, GVA, Ha-Joon Chang, Help to Buy, industrial policy, Market Value, productivity, rebalancing, Singapore, Switzerland, UK Economy. Bookmark the permalink.

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